Economists predict complete ‘taper’ of Fed bond buying by end of March
The Federal Reserve will end its bond-buying programme by the end of March and raise US interest rates soon after, according to a poll of leading academic economists for the Financial Times.
The latest survey, conducted in partnership with the FT by the Initiative on Global Markets at the University of Chicago Booth School of Business, marks an abrupt shift in the economists’ expectations at a time of surging inflation and tumbling unemployment.
Their responses underscore how swiftly the economic situation in the US has evolved over just a handful of months, as well as the pivot under way at the US central bank as it quickly unwinds its pandemic-era support to focus on fighting soaring prices.
More than half of the 48 economists polled said it was “somewhat” or “very” likely the Fed would hasten the withdrawal of its stimulus by several months, bringing a complete stop to bond purchases by the end of March.
A quicker pace could enable the Fed to raise rates as early as the first quarter of next year, a move that 10 per cent of the respondents now expect. Such an abrupt tightening could jolt financial markets, which do not expect the central bank to act until June.
Half of the surveyed economists are forecasting a rate rise in the second quarter. Just three months ago, when the survey was last conducted, less than 20 per cent of participating economists thought a rate increase in the first six months of next year was likely.
“The combination of the high inflation rate and the tight labour market suggests that there is no need for strongly expansionary Fed policies like [bond] purchases,” said Jonathan Parker, a professor of financial economics at the Massachusetts Institute of Technology. “To send the signal that [they] are normalising policy is important.”
Jay Powell, the Fed chair, and other senior officials have in recent weeks adopted a more assertive stance against inflation, underscoring the rising risk of entrenched high prices and the central bank’s willingness to act if necessary.
A subsequent slide in the unemployment rate, which in November dropped to 4.2 per cent, also suggested underlying strength in the labour market recovery, after months of halting progress due to worker shortages.
“The Fed is being data-driven,” said Karen Dynan, an economics professor at Harvard University, who previously worked at the central bank. “All along the Fed has understood that there is a lot of uncertainty about what the future holds.”
The economists, who were polled between December 3 and 6, expect inflation to remain elevated well into next year, with the Fed’s preferred gauge — the core personal consumption expenditures price index — moderating only marginally to 3.5 per cent on a year-over-year basis in December 2022, according to the median forecast. It currently hovers at 4.1 per cent.
Almost two-thirds of the respondents anticipate core PCE will still be above the Fed’s 2 per cent target by the end of 2023.
However, almost 70 per cent said the Fed’s main policy rate would not exceed 1.5 per cent by the end of 2023, suggesting a gradual pace of interest rate increases from today’s near-zero levels.
The FT-IGM survey suggests the Fed will proceed with interest rate increases before the labour market has recovered to pre-pandemic levels.
Survey respondents’ median forecast for the unemployment rate for the end of next year was 4 per cent, with approximately 70 per cent predicting it will return to its February 2020 level of 3.5 per cent in the first half of 2023 or earlier.
Almost a quarter of the economists said the labour force participation rate, which tracks the portion of people employed or looking for a job, will never return to the early 2020 level of 63.3 per cent. Only 19 per cent think it will recover in 2023.
The participation rate, which currently sits at 61.8 per cent, has barely improved since June last year, which the economists attributed to lingering Covid-related concerns and childcare issues.
Tara Sinclair at George Washington University noted that many Americans also have a “financial cushion” from pent-up savings bolstered by the hefty fiscal stimulus programmes passed since the onset of the pandemic.
“Workers aren’t moving as fast as they would have needed to in a different policy environment,” she said.
About the survey
The FT-IGM US Macroeconomists Survey is a series of polls asking US academic macroeconomists to predict the trajectory of important indicators such as gross domestic product and unemployment, as well as to provide their views about likely key policy choices. Questions have been developed in partnership with the Initiative on Global Markets at the University of Chicago’s Booth School of Business, which will administer the survey to its panel of leading economists approximately every two months.
Each edition of the survey asks a handful of the same questions, such as a question about when the US unemployment rate will be back to its February 2020 level, along with a few new ones. Individual responses are anonymous. However, a list of respondents (typically around 50 economists), which may differ slightly from survey to survey, is provided alongside the results of each survey.